Slashing your tax bill.While the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. definitely ought to receive all the taxes it's due, you're not expected to pay a penny more than you have to. By taking advantage of legitimate tax-saving strategies, you can reduce your current tax burden and increase your current spendable income. Consider adding to your investment portfolio tax-exempt financial instruments, such as individual municipal bonds and unit investment trusts. Or you can opt to defer a portion of your taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. by opening an Individual Retirement Account. Better yet, if your company has a 401(k) salary-reduction plan, you ought to be enrolled in it (see "What You Should Know About Your 401(k) Plan," August 1991).
Today's environment underscores the increased importance of tax exemption to the individual investor, especially given hefty increases in federal, state and local taxes. Higher maximum bracket personal income taxes have been enacted within the last year in California, Maine, Minnesota, New York New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , New Jersey, North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures
Area, 52,586 sq mi (136,198 sq km). Pop. , Pennsylvania and Vermont. And Connecticut initiated its new income tax last September.
Moreover, investors in high tax brackets who own certificates of deposit (CDs), money-market funds and other taxable securities should take a close look at the benefits of tax exemption.
Despite state and local budget shortfalls, municipal bonds, better known as munis remain viable investments. Tax-free munis allow for attractive levels of income to be free from federal income taxes (as well as state and local taxes in most cases). Furthermore, municipal bonds yield high interest. They typically pay 80% more than U.S. Treasury U.S. Treasury
Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. bonds, which are not exempt from federal taxes. Unfortunately, the demand for municipal bonds may shortly limit their supply. Up to $250 billion in high coupon bonds (about 30% of the nation's total outstanding volume) may be called--that's when the issuer redeems the bond before it matures--during the next five years. This situation could result in a surge in municipal bond demand. So, it is important for investors who are interested in tax reduction to take advantage of current market opportunities and avoid the reinvestment rush. Note: If munis are sold prior to maturity, the bonds will be subject to market risk.
If you are looking for Looking for
In the context of general equities, this describing a buy interest in which a dealer is asked to offer stock, often involving a capital commitment. Antithesis of in touch with. security, consider insured bonds, which are backed by several AAA-rated insurance companies. The biggest of these are: Municipal Bond Investors Assurance Corp., Ambac Indemnity Corp., and Financial Guaranty Insurance Co. Even more secure are prerefunded muni muni
See municipal bond. bonds, where the municipality issuing the bonds buys U.S. Treasuries and places them in an escrow account, which is used to pay off the muni bonds. This way you get the tax advantage of munis plus the backing of the U.S. government.
Unit Investment Trusts
Any investor who is concerned about incurring the "double whammy" of federal and state taxes should also consider investment opportunities in both municipal bonds and tax-exempt unit investment trusts (UITs). UITs are portfolios of fixed income-securities, such as municipal, corporate or government bonds, mortgage-backed securities Mortgage-backed securities (MSBs)
Securities backed by a pool of mortgage loans. or preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders.
Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. . Assembled and sold by brokerage houses, UITs require a minimum investment of $1,000 and have a load charge of 4%.
If you are concerned about the safety of UITs, buy those rated AAA AAA: see American Automobile Association.
(Triple A) A common single-cell battery used in a myriad of electronic devices of all variety. Like its double A (AA) cousin, it provides 1.5 volts of DC power. When used in series, the voltage is multiplied. by the rating agencies or ones that are insured as payment of principal and interest by an accredited accredited
recognition by an appropriate authority that the performance of a particular institution has satisfied a prestated set of criteria.
cattle herds which have achieved a low level of reactors to, e.g. municipal bond insurer. To further protect yourself, read the fund's prospectus, which will list the credit rating of each bond and its provisions should that bond be called earlier.
Individual Retirement Accounts
Individual Retirement Accounts (IRAs) remain an important part of your overall savings plan, in which earnings grow tax-deferred until withdrawn (see "Resurrecting IRAs," Personal Finance, July 1991). You can contribute up to $2,000 annually ($4,000 per couple). If your spouse doesn't work, together you can put in a total of $ 2,250. Self-employed individuals can set up Keogh plans (tax-deferred pension accounts) and invest annually up to 25% of earned income Sources of money derived from the labor, professional service, or entrepreneurship of an individual taxpayer as opposed to funds generated by investments, dividends, and interest. or $30,000, whichever is less. The self-employed can have both an IRA Ira, in the Bible
Ira (ī`rə), in the Bible.
1 Chief officer of David.
3 Two of David's guard.
IRA. and Keogh.
Because of the power of compounding overtime, even a small increase in your IRA portfolio's overall rate of return can mean a big difference in the size of your investment nest egg Nest Egg
A special sum of money saved or invested for one specific future purpose.
Examples of the purposes for which nest eggs are usually intended include retirement, education, and even entertainment (vacations and cruises). at retirement. Except for collectibles and most precious metals Precious Metals
Valuable metals such as gold, iridium, palladium, platinum, and silver.
Investing in precious metals can be done either by purchasing the physical asset, or by purchasing futures contracts for the particular metal. , you can put IRA funds into any investment, including CDs, money-market accounts, stocks, bonds and mutual funds.
It is very important for you to adjust your portfolio's components in order to maximize returns since economic conditions and your personal objectives change over time. Keep in mind that early withdrawal (before age 59 1/2) of IRA funds incurs a tax penalty.
Annuities are insurance products sold by brokers, insurance agents, financial planners and some mutual fund companies, which allow earnings to grow tax-deferred until withdrawn. And annuities guarantee to pay the investors a steady stream of income over his or her lifetime (see "An Investment Of A Lifetime," Personal Finance, August 1991).
There's no limit to the amount you can invest. However, you may have to pay an initial minimum investment of $5,000. Some insurers allow you to make monthly payments for as low as $50. Also, annuities are loaded with fees and charges.
Many investors opt for a variable annuity Variable Annuity
An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. . The appeal is that their money is invested in a diversified portfolio that may contain stocks, bonds and/or mutual funds. The investor doesn't have to pay taxes on the dividends or capital gains until they withdraw the money. Early withdrawals (prior to age 59 1/2) are subject to penalties.
One of the best tax deals is corporate-sponsored plans. Tax-qualified salary-reduction plans, such as 401(k), allow both the employer and employees to contribute toward a retirement fund while reducing their tax burden. Typically, companies match 50 cents (up to 6% of an employee's earnings) for every dollar the employee contributes. You can invest up to $8,370 annually. Most company 401(k) plans have loan provisions that allow employees to gain penalty-free access to their funds. Whichever vehicle you choose, a tax-free or tax-deferred investment will be an essential portfolio ingredient. The cardinal point is that you want to keep more of what you earn.